Background

Money laundering is a widely-recognised global problem which allows criminals to profit from their crimes. The issue is estimated to cost every UK household £255 a year.

The Proceeds of Crime Act 2002 provides a system for businesses to report suspicious financial activity to law enforcement agencies. However, there has been recent criticism of the SARs regime, following a significant amount of low-quality reporting and criminals being able to avoid detection. Firms face substantial costs as a result, with estimates of at least £5 billion spent annually on financial crime compliance. There is also the knock-on effect of financial losses to businesses and individuals who are unable to transfer funds when there is suspicion of money laundering. Customers that face these delays also cannot obtain a reason for the delay from their bank due to the “tipping off” offence outlined in the act.

In December 2017, the Home Office asked the Law Commission to review the anti-money laundering (AML) and counter terrorist financing (CTF) regimes within Part 7 of the Proceeds of Crime Act 2002 and Part 3 of the Terrorism Act 2000.

KEY POINTS

The 222-page consultation paper covers a wide range of issues and proposals. Some of the recommendations within the report include:

1. Improving the quality of SARs and information sharing

The term ‘suspicion’ is often misunderstood and contributes to poor quality disclosures. It was found that a significant number of SARs did not articulate the grounds for suspicion clearly. The consultation wants to explore how to reduce low-quality reports and focus on accounts in which there are reasonable grounds to suspect property is criminal property. The report also wants to explore views on the extent to which information is shared amongst the private sector when suspicion arises.

2. Statutory guidance for SARs

The Law Commission proposes that statutory guidance on ‘what to look out for’ should be issued by the Government. A list of factors that indicate suspicion and a proposed set format for submitting SARs are contained within the report. The Law Commission also proposed a decision be made on the narrowing of the definition of the term “suspicion”.

3. Enhancing the consent regime and exploring alternative approaches

The consent regime is the process by which individuals ask permission to complete a transaction where they have a suspicion that they are dealing with the proceeds of crime. However, the vast majority of consent SARs do not result in restraint or seizure of assets. Alternative approaches are proposed, such as US-style Geographic Targeting Orders and thematic reporting.

4. Criminal property and mixed funds

A challenge often encountered by banks is the mixture of legitimate and illegitimate funds in an account. Some accounts only have a small amount of illegal funds leaving the only solution to freeze all funds. Some firms ringfenced funds under the current act, but felt they were still exposed to legal action. The consultation proposes a method for ringfencing funds based on pre-consultation discussions with stakeholders.

5. Reviewing the “all crimes” approach

A benefit of the “all crimes” approach is that it relieves the requirement of regulated firms to understand the full extent of criminal activity behind the funds. However, the “all crimes” approach has led to some unintended consequences, with technical breaches exposing some professions to money laundering risks, e.g. legal professions. The consultation proposes an alternative, focussing on a “serious crimes” approach and discusses the advantages and disadvantages of moving away from the current legislation.

6. Targeted transaction reporting and record keeping requirements

The consultation proposes a new power to require additional detail and record keeping requirements targeted at specific transactions in order to identify the existence of criminal property and improve record keeping, while ensuring that evidential gaps are closed.

7. Defence for not making a SAR

There is a consideration for statutory guidance that will provide a detailed list of factors that would amount to a defence, or a ‘reasonable excuse’, for not making a suspicious activity report, for example, a ‘reasonable excuse’ defence for non-serious crimes.

8. Corporate liability

There is a suggestion in the paper that there should be a focus on corporate criminal liability where individuals fail to report money laundering due to a commercial advantage. The consultation notes a preferable method of imposing liability on businesses that fail to prevent an associate from committing a reporting offence.

NEXT STEPS

The consultation is expected to help firms enhance the flow of information to law enforcement agencies and reiterates the importance of identifying suspicious activity. The consultation closes on the 5th October 2018.

CONSIDERATIONS FOR FIRMS

The paper has captured the overall challenge for both law enforcement agencies and the private sector in the face of money-laundering. Overburdening and increased compliance costs have sparked an interest amongst many firms in automating repetitive tasks and using machine learning to assist with identifying suspicious transactions. Adequate transaction profiling and monitoring systems, with calibrated ‘fuzzy’ (less than 100% perfect match) matching systems, and related exception thresholds should be regularly fine-tuned and reviewed.

However, there is a risk of over-reliance on technology and firms should consider the right blend of automated tools and human expertise. Firms should ensure they have a robust internal reporting system that allows nominated officers to submit correct reports to the National Crime Agency.

Staff should be adequately trained in identifying the signs of money laundering and terrorist financing. Controls should also be in place to prevent staff from ‘tipping off’ and ‘prejudicing an investigation’. Overall, a comprehensive case management system is vital if your firm is to avoid regulatory and legal scrutiny.